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THE WALL STREET JOURNAL: Versatile Malaysian Refiner Is Starting to Turn Some Heads: “KUALA LUMPUR, Malaysia -- Sharply higher oil prices have hit most Asian refiners hard. But Malaysian Shell Refining, a low-profile local subsidiary of the Royal Dutch/Shell Group, is cashing in and rewarding investors.” ( 15 Dec 04




December 15, 2004


KUALA LUMPUR, Malaysia -- Sharply higher oil prices have hit most Asian refiners hard. But Malaysian Shell Refining, a low-profile local subsidiary of the Royal Dutch/Shell Group, is cashing in and rewarding investors.


The company's secret lies in its dual-purpose refinery, which can process both light and heavy crude oil and allows Shell Refining to exploit the substantial disparity in prices between the varieties of oil traded in international markets.


Prices of sweet, or light crude, oil -- such as the West Texas Intermediate Cushing, North Sea Brent or Malaysia's Tapis -- last month topped $50 a barrel, and currently trade at around $42. But prices for sour, or high-sulfur heavy crude, produced mainly in the Middle East, have stayed steady at about $37 a barrel.


Many of Shell Refining's Asian rivals run refineries that can process only the more-expensive sweet crude. But the company's 125,000 barrel-a-day refinery, about 100 kilometers south of Kuala Lumpur, can handle sweet and sour crude oil in equal portions. Refining heavy crude typically produces a substantial amount of low-value fuel oil in the first round of distillation. But Shell 's Malaysian refinery boasts a special "cracker" unit, which can convert fuel oil into higher-end products such as propylene, liquefied petroleum gas, gasoline and diesel for fast-growing markets such as China.


So, while margins for sweet-crude refining operations are being squeezed by high prices, Shell Refining's sour crude train, or processing unit, is locking in tidy profits.


Jason Chong, senior portfolio manager with UOB-OSK Asset Management in Kuala Lumpur, ranks Shell Refining as one of his favorites on the Malaysian stock exchange in recent months. "It's got strong earnings, a good dividend payout record and it's cheap," says Mr. Chong.


Shares of the 51%-owned Royal Dutch/Shell Group unit closed unchanged yesterday at 8.60 ringgit ($2.26), which translates to a price-to-earnings ratio of five times Shell Refining's projected earnings for 2005, according to Tan See Ping of CIMB Securities in Kuala Lumpur.


That's a big discount compared with the average P/E ratio of about 8.5 each for Shell Refining's regional rivals such as Indian Reliance Industries and China's largest refiner, Sinopec Zhenhai Refining & Chemical.


Mr. Tan, among the few Malaysian analysts who track Shell Refining, reckons fair value for Shell Refining stock should be about 13 ringgit, or a P/E ratio of about 7.5 times projected earnings for the year ending Dec. 31, 2006. Shell Refining has received relatively little attention partly because its management rarely meets with investment analysts. But market-watchers took notice three weeks ago when Shell Refining announced net profit jumped to 184.8 million ringgit for the quarter ended Sept. 30, up 5.6% from the previous three months, and more than double the 86 million ringgit it posted in the same period of 2003.


Analysts had expected Shell Refining's third-quarter earnings would dive by as much as 50% from the 175 million ringgit reported in the preceding quarter because of higher crude prices. "Everyone clearly underestimated the margins Shell was taking in from heavy crude refining," says one Malaysian researcher.


Few are underestimating Shell Refining's potential now. Asian refiners are already operating at near-full capacity. With no new production capacity coming onstream for the next two years, industry analysts say that prices for refined products are expected to remain firm in the medium term. In the meantime, anticipated higher production levels in the Middle East will keep prices of heavy crude stable. Taken together, these factors should help Shell Refining maintain robust profit margins, analysts say.


There is one potential downside: a possible revaluation of the Malaysian currency, the ringgit. In the past two months, some foreign funds have been betting that Kuala Lumpur will revalue the ringgit, currently pegged to the dollar, in lockstep with China should Beijing let the yuan appreciate. Given that the bulk of Shell Refining's revenues and costs are denominated in dollars, a stronger ringgit would have a direct impact on the company's earnings.


But many Malaysian analysts and economists believe that a currency revaluation is still a remote prospect. They say that Malaysia's economic planners are likely to maintain the ringgit's peg of 3.80 to the dollar in order to enhance the competitiveness of the country's export-driven economy. "Any revaluation will happen later rather than sooner," contends Mr. Chong.


Meanwhile, Mr. Chong is eyeing another dividend payout from Shell Refining in coming months. The company has so far declared 30 Malaysian sen in dividends since the beginning of this year and Mr. Chong expects a final dividend of 20 sen when Shell Refining announces full year results in late January. That would amount to a gross dividend yield of 5.7% for 2004.


"It's better than any return Malaysian banks are giving on deposits," says Mr. Chong. "And you are also looking at a capital appreciation."


Write to Leslie Lopez at

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